Israel’s Economic Paradox

The advent of the Bretton Woods economic system in 1944 ushered in the era of GDP worship. Since then, and despite forces trying to temper its significance, the GDP remains the primary metric for determining economic health. It represents the total dollar value of all goods and services produced over a specific period. Over the last several years, Israel’s GDP has continually trended upward, displaying strong economic growth. Some suggest that the latest numbers are illusory, thereby questioning Israel’s seemingly robust economic health.

Over the last three years, Israel’s GDP has grown at approximately 3% per year. Although not as strong as previous years, which saw a 5% growth rate, its current growth rate is still strong. Economists chiefly attribute this to Israel’s highly developed tech sector, which exports technology internationally. This started in 2007 when the Bank of Israel devalued the Shekel to lower the price of exported Israeli technological products. This resulted in the creation of new markets and led Israel out of the pioneer/socialist mentality into the capitalist/market economy.

Concurrently, Israel has seen exceptional population growth. Israel’s current population stands at more than 8.4 million people, a 2% growth from the previous year. In fact, Israel has the highest birth rate of any developed country in the world, with an average of three children per woman. 2015 saw the birth of 168,000 children and 28,000 new immigrants. Anti-Semitism in France and instability in Ukraine and Russia fueled 72% of immigration. In addition, the declining unemployment rate kept many Israelis at home either employed or optimistic about employment, reversing past trends when many Israelis chose to emigrate for better employment opportunities.

Interestingly, the strongest population growth was in the Arab sector, which now consists of over 20%, or more than 1.7 million people, of the Israeli population. More specifically, the Jewish population grew by 1.7% over the previous year while the Arab population grew by a more significant 3.2%. At the same time, both American and European Union population growth rates were below 1%.

In noting the correlation between the GDP and population growth, Globes commentator Avi Tempkin stated that “[t]he rate of growth has to be related to the rapid growth of Israel’s population — which increased by 2% in 2015, up from 1.8% to 1.9% in previous years. These are much faster rates than in the U.S., let alone those of Europe. Measured on a per capita basis, Israeli GDP growth is actually very low — in 2015, it was negligible.” In short, Israel’s GDP growth is illusory because the real growth rate was flat.

Based on the above, the government is sending mixed messages regarding population growth and economic growth. Last month, the Knesset committee for Aliyah and Absorption allocated NIS 1.18 million to promote Brazilian Aliyah; for some time, the Knesset committee for Aliyah and Absorption has encouraged Aliyah by running programs in both France and Ukraine, with much success. At the same time, Israel trumpets its tech sector as the new face of Israel. Yet, based on the above, continued and accelerated population growth hurts the overall economic health of the economy.

During the initial years of the State, the government promoted Aliyah. It sought to inflate the population through immigration policies wherein the government housed and fed immigrants. In addition, the government aggressively sought to indoctrinate immigrants with Zionist pioneer ideology. To an extent, the government accomplished its goal as immigrants, comprised largely those who survived the Holocaust, streamed into Israel and joined Kibbutzim and the like. They were strong, worked in agriculture, and sought to shed the old-world Jew.

The current face of Israel contrasts with those pioneer days. Those who work out in the hot sun to make the desert bloom are no longer the elite of Israeli society; instead, those who attain recognition through secular education are lauded. They have thrown away the outdoor life, shovels, and overalls for air-conditioned offices, computers, and suits. Elitist professionals replaced elitist Kibbutzniks. The capitalist upper class replaced the socialist upper class. What’s more, the Israeli Prime Minister is a former employee of Bain Capital and a corporate lawyer leads the political opposition.

Israeli economic policy reflects those changes. Current economic policy favors professionals and capitalists, not blue-collar socialists. Despite these changes, Israel continues to promote Aliyah and other population growth policies.

The paradox is immense. Nonetheless, Israel continues to pursue both its monetary and immigration policies. With that said, life in Israel is not confined to natural terms.

About the Author
Ari Mushell works in the investment banking industry in New York City.
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